Jerri-Lynn here: Wolf notes in his headnote to the original post:
Don Quijones and his wife, who is from Mexico, spent part of the summer in Mexico but returned to Spain a few days before the earthquake. DQ’s in-laws live in Puebla, Mexico City, and Morelos — among the hardest hit places. They got through it unharmed and are more or less OK for now.
By By Don Quijones of Spain, UK, & Mexico and an editor at Wolf Street. Originally published at Wolf Street
Rebuilding with no insurance and little government aid.
Rescue efforts in Mexico are beginning to wind down after a trepidatory (vertical) earthquake unleashed destruction and bedlam in Mexico City and the two central states of Puebla and Morelos on Tuesday. The temblor took place 32 years to the day after a horrendous quake killed at least 10,000 people in Mexico City in 1985.
Thankfully, the number of victims this time is many magnitudes lower, due largely to improved building standards and enhanced public awareness in the wake of the ’85 quake. Nonetheless, the death toll is close to 300 with thousands more injured. And for survivors the financial toll is just beginning.
Just as happened in 1985, the response of civil society to the latest disaster has been astounding. As CNN’s Mexico correspondent Susannah Rigg reports, rather than rushing away from danger in the immediate aftermath of the quake, many people ran towards it, in order to help others who may be trapped in collapsed buildings.
All over the city, people began forming human chains to help remove debris while other volunteers, including the so-called “topos” (moles), a famous volunteer group that formed after the 85 quake, burrowed into the loose wreckage in search of survivors. So far these groups have helped rescue scores of people, including eleven school children, from the debris. Social media has also played its part by helping send people to where they are most needed.
It’s this kind of solidarity that is keeping Mexico going. In fact, in some areas there are so many people helping out that willing volunteers are being told that no more help is needed. Hospitals are providing free care to the quake’s victims, architects and structural engineers are assessing the structural health of buildings free of charge, and therapists are offering free counselling.
Everybody wants to do their bit.
Even the government has tried to play a bigger role this time, after coming under scathing criticism for its inaction and corruption during the ’85 quake. But the government, both local and federal, is already deeply in debt and local administrations are being forced to make drastic cuts in their spending. Of the limited funds the government does have at its disposal, serious doubts have been raised as to how much of it will end up reaching its intended recipients.
The total amount of money in Mexico’s disaster relief fund is just 9 billion pesos (just over $500 million). That’s a tiny fraction of the amount of money Mexico’s elected officials are alleged to have plundered from state coffers in recent years. According to the Mexican newspaper El Universal, Mexican state governors are estimated to have defrauded the country of 259 billion pesos ($14.6 billion), more than enough to fund the rebuilding effort not only in Mexico City, Puebla, and Morelos but also the south eastern states of Chiapas and Oaxaca, which were rocked by a 8.2 quake over two weeks ago.
To further hamper the rebuilding effort, most of the apartment and office buildings affected in both quakes are not insured against natural disaster. This is one of the sharpest differences between disaster recovery efforts in advanced economies and emerging or developing ones. When people lose their homes or businesses in less advanced economies such as Mexico, they usually have to rebuild from scratch, with little or no financial support from the government or insurance firms.
Even among its peers in Latin America (with the notable exception of Brazil), Mexico is desperately under-insured, despite its heightened exposure to seismic activity and other forms of natural disaster. According to the Financial Inclusion Report of the National Banking and Securities Commission, the total penetration of the insurance sector in Mexico in 2015 was 2.1% of GDP, compared to an average of 3.1% for Latin America as a whole.
The Mexican Association of Insurance Institutions (AMIS) reports that only 8.6% of homes have a policy that covers damages from natural disasters. Roughly 5% of micro-enterprises insure their properties, a percentage that increases to 15% among small businesses. In other words, more than nine out of every ten homes and more than eight out of every 10 businesses affected by the earthquake have zero insurance coverage.
In Mexico City a total of 38 buildings have collapsed completely since Tuesday’s earthquake but another 3,800 are estimated to be damaged. That number is likely to rise sharply in the days and weeks to come as teams of surveyors assess the level of damage in each affected building. If the structure is deemed to be unsound, the building will have to be demolished.
Right now, thousands of people in Mexico City, Puebla, and Morelos, including close friends and family, are on tenterhooks. They know that if they lose the apartment or business they spent years (or even decades) paying off or building, they’re right back to square one. And for many, it’s probably already too late to go that far back.
So where does the money go that Mexico borrows? Answers emerge. Including offshore private accounts. Read… Where Does the Money Go that Mexico Borrows?
“In other words, more than nine out of every ten homes and more than eight out of every 10 businesses affected by the earthquake have zero insurance coverage.”
Well, how affordable are these insurance plans?
Insurance premium levels and thus affordability is a catch-22.
The less insured parties there are in the pool, the greater the chances of the insurer having to pay out (even if the insurance policy underwriter re-insures and becomes a constituent of a wider pool, the pool of liability and its reinsurance costs are proportionately higher).
If I take out life insurance to the value of £1 million and I am the only policyholder insured in the pool of those covered (that is to say, I am a “pool of one”, for the sake of example), then my premium is higher than it would be if 100,000 males aged 40 to 50 living in England all had the same cover. This is because there’s a higher risk of me dropping down dead in the next year than there is of all 100,000 others in a pool have of suffering the same fate.
Lambert has covered this topic extensively in “Obamacare death spiral” posts.
Real incomes and share of wealth for ordinary Mexicans needs to be rebalanced so as to allow more of them to have sufficient disposable income to be able to buy buildings insurance. Not, of course, a problem unique to Mexico. Low levels of insurance coverage is effectively a different version of a low savings rate problem — like those studies which show that X percent of the population can not afford a $1000 emergency fund for contingencies. If your furnace fails this winter and is irreparable, could you simply find $3000 in cash to buy a new one? Or would you have to borrow the money, or do without, or get a second-best solution that is going to cost you a lot more in the long run? We suffer the same problems, in different ways, for the same reasons.
I’m not sure your life insurance example works all that well with regard to natural disasters unless your insurance pool is all chronically sick people destined to die soon. While we all die at some point our earthquake susceptibility varies widely. The only people that will sign up for earthquake insurance are the ones who will be affected. I don’t see where an economy of scale works if say one person in Cali buys earthquake insurance or if they all do. They will all be paid out when The Big One hits. No one in NH is going to buy into the program to help ease costs the way young people get life insurance because hey, you never know. Betting on the non-recurrence (or well timed spacing of recurrences) of a recurring natural problem seems a losing proposition to me (let’s “hope” we recover financially from the Mexican payout to cover the next Cali one, or Japanese one, or SE Asian one, or etc). It’s not like driving or health where behaviors can modify the outcomes. While, yes, you can hurricane or earthquake “proof” (damage mitigation vs damage prevention) your house, your behavior has zero effect on whether an earthquake or hurricane comes (frackering and climate change not withstanding). This seems an appropriate area for governmental insurance (a la flood insurance), not markets. If a community has to put money towards something like this I’m sure they would much rather have the dollars go to actual rebuilding and not putting some CEOs kid through private school. Bake it in to local taxes if need be. Let a community be the foundation of their own resiliency.
You are confusing pricing to risk with how insurance profitability works and your claim value averages affect premiums.
Yes, higher risks by necessity requires higher premiums — this applies to catastrophe insurance for things like earthquakes, hurricanes / typhoons, flooding and volcanic activity among other events as well as human-influenced risks such as smoking when calculating a life insurance premium.
Mexico and any other seismically active areas will have higher insurance costs than a zone which doesn’t have high incidences of earthquakes.
But insurance companies costs are determined by actual claims in terms of monetary value per claim.
Let’s assume as a starting point that a Mexican insurance company had insured 10 residential properties with an average rebuilding cost of $100,000 each. All are now a total loss after the earthquake. The insurance company is now facing $1m of losses which it must recoup from the pool, let’s say it had 100 policy holders in it. As insurance coverage is skewed to high value properties, each policy holder has a residence of similar value.
If the earthquake has a return period of 10 years in terms of risk, the insurer must take on average of $1000 a year in premiums per policy to cover its likely costs of claims in the next 10 years (it is a little more complex than that as I am omitting some other factors, but they don’t alter the substance of this explanation).
Now, let’s say that a new potential policyholder approaches the insurance company but they are a lot less affluent than the insurer’s current pool. Their house is only worth $10,000.
But the insurance company must still charge ~$1,000 in annual premiums because this one additional much more modest house makes scarcely any difference to the aggregate value at risk the insurer is carrying. The poorer but lower monetary claim-risk customer will likely conclude it isn’t worth the cost. Which it isn’t — they would be subsiding all those potentially high-value claim presenting policy holders and their expensive houses.
It would take a big influx of similar low value claim potential new policy holders into the pool to change the policy cost dynamic.
And in case you are wondering, it doesn’t help for a new entrant in to the market to try to set up a special segregated pool of low potential value claims policies by advertising to lower value home homeowners. A high potential value claim customer would simply buy a policy from that insurer and enjoy a subsidy from the lower claims costs policy holders.
Mexican property insurance, as a market, isn’t really identical to the Obamacare Death Spiral I mentioned earlier; it was never really alive in the first place.
Also, a long read and a different aspect of catastrophe insurance and the problem of trying to resolve fundamental flaws in inherently neoliberal solutions is in the generally good report from the UK Parliament on flooding reinsurance.
Be aware you need to not wince at the occasional references to expressions like “market failure”. But like I say, not a bad comprehensive analysis.
No, according to your explanation I do understand. You have a great explanation of how things function. I’m more or less saying (apparently not very articulately) that the idea doesn’t work for natural disasters (due to greater variability and our lack of complete understanding of their nature) and that natural disasters shouldn’t be private capitalism (in the profitable times) and public socialism (when disasters actually hit) akin to banking. Insurance companies take your money and give it back when something bad happens. Local governments can take that same money to mitigate future disasters and put something away for that proverbial (or the literal) rainy day. Ounce of prevention vs the pound of cure. The experience closest to me was when Irene wrecked Vermont. The damage was exacerbated by failure to upgrade/maintain culverts and other flood control devices/precautions. Would damage still have occurred if some of the flood insurance money had been spent before on those items? Yes, but likely not near as much and definitely with less overall economic impact to the state due to lost work. Before Irene my friend lived 5 min away (not much more than a mile as the crow flies). After Irene he lived over an hour away due to multiple bridges being out. At that point insurance money is really a day late and a dollar short. I’m not saying there isn’t a place for some sort of insurance for those “acts of God” that are unable to be mitigated but that money could be better spent beforehand and that such insurance not provide a small number of people with great wealth.
What you are suggesting now (which is only one among several conflating points you raised originally which I did my best to unpick) — namely state (be it local or national) provided disaster resistant infrastructure, is not intrinsically a bad thing but has two important issues.
One is that, absent some method of enforcing a co-pay based on the value at risk being mitigated, it is potentially a wealth transfer from poor and middle incomes to the wealthy. You are relying on an unstated assumption that the houses protected by new flood prevention measures are all inhabited by low or average income residents. This is not necessarily true in all cases. If a tract was created and filled with McMansions but is in a flood risk area, why should a low income household in the same county have to pay to disaster-proof the assets of those who could afford either insurance or even the cost of the infrastructure enhancement?
Secondly, you risk creating perverse incentives. What is to stop a speculative developer deliberately building a new residential real estate project in a known flood risk area — knowing that “someone else” will pay to remediate the risk? Or a landowner of a formerly worthless (in terms of building potential) lot suddenly enjoying windfall profits because that land has had its value increased due to no longer being in a flood plain?
There are no simplistic answers to these conundrums. In lower-risk flood-prone areas, affordable flood insurance with a government-backed and strongly regulated reinsurance scheme is just as valid a countermeasure as flood defence infrastructure.
In high risk areas, offering to buy people in low to middle income homes (up to a specified market value or income threshold and excluding second homes and the like) out — which the FHA will do in cases of defective housing construction so isn’t a hugely different precedent — might be a better use of resources in the long-term.
Merely suggesting that building our way out of trouble is always and everywhere the best or only option is a little narrow. It’s essential to figure out how to prevent undeserving parties from benefiting in an unwanted way.
And that’s before we’ve even considered the problems which arise from public-private financed infrastructure projects, which are an out-and-out gimmies to big finance.
I live in the highest risk zone, near the center of Mexico City, in a very modest apartment in a well-constructed building built in 1935. We’ve had no damage in either of the recent earthquakes–buildings of this vintage and older are generally safer than newer ones, though I doubt that is taken into account in calculating insurance premiums. I pay an annual premium of about 0.75% of its insured value, though I won’t be surprised if it goes up next year. The policy covers pretty much everything, though for earthquake damage there is a substantial deductible. In a total loss from an earthquake I’d probably get half. Of course, if everyone had insurance, and if insurance wasn’t designed primarily to profit multinational banks, it could provide even better coverage at less cost. Mortgages through government programs designed for those with medium to low incomes–which a lot of my neighbors have or have had–include insurance, though I’m not familiar with the details.
While it is true that there have been improvements to building standards in Mexico City since the 1985 earthquake–indeed, I read the other day that Mexico City’s are among the best earthquake standards in the world–these have not been accompanied by improved adherence or enforcement. Corruption is rampant here, and it is much cheaper to pay off building inspectors than it is to construct buildings properly. There are close ties between developers and the Mexico City government and political parties. There were also many buildings severely damaged in 1985 that either collapsed last week or are still, barely, standing. In one well-publicized case, an apartment building that was condemned in 1985 was abandoned for a few years; one day, the legal notices were mysteriously removed from the wreckage, it was “rehabilitated,” two additional stories were added, the apartments were all sold to new, unsuspecting owners–and it collapsed on Tuesday. The private school that has been in the news–the one with the little girl trapped in the wreckage who turned out to not to exist–collapsed because the owners illegally built themselves apartments on top of the school–and it was their marble floors and granite countertops that came crashing down on the children and staff and made rescue so difficult. This happened despite the fact that schools cannot be reopened after an earthquake until they are inspected–and the school passed its inspection after the other strong earthquake two weeks before. There’s a good article about some of these issues at https://www.lrb.co.uk/blog/2017/09/22/homero-aridjis/the-girl-who-wasnt-there/.
There was an interesting link this weekend to code enforcement after Hurricane Irma in Florida: http://thefreethoughtproject.com/help-fl-residents-repair-homes-faster-officials-threaten-tickets-code-violations/
As I see it, there are really two parts of this article, one of which should be met with derision and the other with thoughtful support. The concept of immediately citing people for hurricane damage to fencing etc. is pretty ridiculous and should be shamed.
However, codes should not be waived for repairs and reconstruction because then weakness that could cause fire, electrocution, collapse etc. in the future are baked in and can become inevitable. So this is what post-disaster code enforcement should be focusing on because this is what the future safety depends on.
I think the government is doing a Ferguson. Especially as they are giving out those notices within six hours of the hurricane. Rushing the process they need to go through to get that sweet sweet money from fining the bleep out of everyone. They don’t want to raise taxes or sell bonds as that’s socialism or something. It would also make getting campaign “donations” harder, any the wealthier residents have stronger buildings in safer areas probably so are less likely to get those notices.
Reminds me of the San Francisco city hall built before the current one. It was finished just before the 1906 Earthquake at some ungodly cost. It was already an real ongoing scandal, but its near complete collapse in the quake made it greater. The fire might have destroyed it, but that got half the city too. A lot of buildings did not collapse. If it had been built as it was supposed to, it would not have.
The building had been shoddily contructed using no, or nearly none, of the material the city had paid for with kickbacks and bribes for everyone.
Yeah, corruption already well under way.
At least Mexico is not short of construction labor to rebuild. 1/5 of Mexican working age males are in the U.S.
Materials are not much of a problem as Mexico exports cement and steel to the U.S.
Were Mexican laborers to return home with their skills and talents, rebuilding would be a cinch, other than the issue of how to pay them. Maybe the Mexican government could create bonds to pay rebuilding labor costs and the goverment could back them up not for immediate rebuilding relief now with a guaranteed promise to pay tomorrow based on future oil production?
Hell, Trump could issue an executive order backing the bonds with the proviso that the illegals here leave and go back home to work there? How do I collect my consultant’s fee?
Mexico has an abundance of skilled workers in the construction trades in-country.
The issue is depressed wages and the flouting of labor laws.
The minimum wage is less than $5 USD/day. The purchasing power of $5 in Mexico is maybe closer to $15 in the US, being optimistic (food prices are pretty close to those in the US).
Something like a quarter of Mexicans working full-time are actually earning that.
Mexico’s elites have never learned to share. They prefer to blame every problem on the US and their supposedly backward population.
And yet despite all that, net Mexico-US immigration is now negative, more going back than staying.
But, far more Central Americans are now migrating, legally or otherwise to the U.S., plus Asians.
IIRC, 6 families in Mexico own 90% of the industrial capacity. The other 10% is the state owned PEMEX.